What Owning a Small Business Can Do for Your Personal Finances

by Thursday Bram · 39 comments

On the surface, it seems like owning a business only makes your personal finances more complicated. You have to deal with more paperwork when tax season rolls around and you have to keep books for your business. But while the financial paperwork does increase, having a business of your own can make a big difference in your personal finances in a positive way.

Tax Breaks

As a business owner, there are often opportunities to reduce your tax burden. Business expenses are tax deductible and, if your business is based on something you’d be doing anyway, you may even be able to deduct purchases you’d make whether or not you run a business. You do want to be sure that such an expense is actually necessary to the success of your business, so you can show proof when the IRS audits you.

Margin of Safety

If you’re running a small business on the side, you can have more secure finances in the event of a problem with your day job. In the event of a layoff, your business will still be bringing in money. It may not be as much as you’re used to earning, but it can keep things a little more manageable in the short run.

Opportunity for Growth

One of the nice things about having your own business is that you can earn additional income even if you’re already working full time. But the opportunity to increase your income with a business is much better than with an employer. After all, there is an upper limit to what most employers are willing to pay their workers, even when the worker in question is helping the business to bring in plenty of income. If you own the business, however, you can continue to increase your own income by increasing that of the business.

Mindsets

Entrepreneurs really do have a unique mindset, focusing on self-reliance and self-improvement. The typical business owner is always looking for opportunities to move forward, which can be crucial. It’s easy to remain at a job or in a situation because you’ve gotten used to it, but having a small business can help you create a forward-thinking mindset, no matter the size of the business you’ve started.

Editor’s Note: Mindset is extremely important. Who knows? Having a “can do” attitude might even help you land that promotion you found impossible to get before!

Starting a Business

It is important to have a good grasp on your finances in general before you start a new business. A new business, after all, typically requires investment. Depending on the type of business you choose, you’ll have the option of investing time or money — but investing either requires having a good grasp on where your money and time are already going.

Not everyone wants to own their own business and if your priorities don’t include entrepreneurship, it’s probably not worth the time and effort a good business requires. Nor should you start a business just for little things like tax breaks (the IRS looks out for such situations). But if you have an entrepreneurial bent, there’s no time like the present to explore the benefits of starting up a business of your own.

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{ 39 comments… read them below or add one }

Ted March 24, 2010 at 9:21 am

We have a photography biz on the side that is growing a bit. It is great because my wife can be home with the kiddos and still have a good job with some great potential.

And if I lose my job, I will start pouring 40-60 hours a week into it if it is close enough to supporting us. Or put in 20-30 hours there and look for a job with the rest. My job is also somewhat seasonal so I can put in 2-5 hours a week (my wife puts in about 20) during busy times and 10+ in slow times. It is also quite fun too as we have something we both work on and work towards.

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MoneyNing March 24, 2010 at 9:29 am

I second the opinion. A good portion of the folks I knew told me how risky it was to start my own business two years ago. But the reality is that people can lose their jobs in an instant while a small business can always keep going as long as they manage their cash flow properly.

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Ben September 16, 2010 at 8:51 am

There is no risk. I don’t understand why people say this.
You don’t start Microsoft corporate headquarters with 1000 employees per building on day one.
I also didn’t open a business with space rental requirements and heavy overhead costs to begin with.
Dude, you are an American… That’s what garages and basements are for.
There is no risk.
Just don’t expand beyond what you are ready for.
When you are ready, there is no risk.
Ah.. And start loaning on kiva.org. It helps keep perspective on how far a dollar can go. You will need that.

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Terry March 24, 2010 at 9:44 am

I started taking contract jobs drafting. The pay is great and I found that I’m not as tense at work because my financial situation is more sound too. Since I’ve done that, instead of my work suffering, I found that my productivity actually INCREASED.

A side business is great.

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Ben September 16, 2010 at 8:54 am

The challenge and results of a new side business or full time will make you a better and stronger person. Remember people, when challenged, you will rise to the occasion and you will be successful beyond what you could imagine.
Terry, did you even imagine that when you started?
Not as tense… Something tells me that one day soon you will leave your job. Maybe downsize living standards a little for a bit… And the rest of that tension will disappear… And your earnings from drafting will greatly exceed your paycheck in a short time.

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Random Thoughts of a Jersey Mom March 24, 2010 at 10:06 am

You’re right. Not everyone wants to have their own business. Those who are looking into starting a business should understand that they may have a 7 day work week. If they’re okay with that then heck, go do it.

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MoneyNing March 25, 2010 at 9:01 am

It’s true. A business can consume someone’s time very quickly. But I want to add that they do so because they choose to. It’s not necessary to work on your business 24/7. Entrepreneurs spend a great deal of time on their business because of a combination of wanting to do better and fearing for failure.

If it’s just a side business, you do not HAVE to work unless you want to. Of course, the harder you work, it usually means better results.

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Ben September 16, 2010 at 9:00 am

If you open a restaurant yes. But, choose a business that doesn’t require that.
Heck, make some jewelry in your spare time. Get really good at it. And sell it at chamber of commerce festivals in your area at a table so you can meet interesting people, or sell it online.
If you are really great at making jewelry and your demand is high… You might find yourself busier. But, say… Leave your info, I will email you when more jewelry is available.
Ask people who run similar operations. How demanding is it?
What are the rewards?
Then choose what you wish to challenge yourself with now.
People think this is all or nothing.
When I was 9 I made beaded necklaces In my free time. They sold them at the mall for $15. I sold them to friends at school for $12 for their allowance money. They were buying them anyway. I made about $500 and I was nine. And I spent like $40 to make all those… And just 30 minutes on each.
You learn on something small and non time consuming. Then, you choose if you want to be consumed.
I love being consumed by my restaurant. Party at my place (restaurant) on Saturday night. Seems everyone comes to me for fun.

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Ben September 16, 2010 at 9:04 am

As for effort required. I work with a former green beret.
There saying is… ” it’s mind over matter… If you don’t mind, then it don’t matter.”

Follow a passion and you won’t mind. It simply won’t feel like work.
Aha.
That is what is missing from this conversation.
Terry remarked that with a side business productivity at work increased.

I can work 80 hours and have it not feel like work. Why? I dug in deep and found out what I really want to do with my days first. Then I built a business around it.

Key: If you choose slowly and carefully after reading… What color is my parachute, or some book like that… Or, Richard Cheng’s, the Passion Plan… It just doesn’t feel like work.

See, the employee mentality is very very different.

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kt March 24, 2010 at 10:38 am

it is important that you have stated that starting a business requires a lot of time and effort invested(not so much money this days in the case of an online venture). it is also inportant to do enough research before you bet entrepreneurial, but as you say”there is no time like the present”

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Cd Phi March 24, 2010 at 4:43 pm

Growing up in a family that owned a small business, I saw many ins and outs of operating a small business and I believe that I would one day love to open my own. There are a lot of responsibilities but that additional income really helps not to mention the flexibility of practically being your own boss. Sometimes businesses don’t work out and they fail but every fail is a lesson learned.

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Ben September 16, 2010 at 9:08 am

As long as your business truly helps people at an affordable rate in a way that they want… Then your business will succeed no matter what. Just be the best at what you do.

You would love opening your own. But, remember, think of your favorite thing to do in life. If you love being a parent, or playing tennis, compare the experience to being on the sideline watching.

You will love it when you take step one to do it.
Now, you only think you will love it.

Being in love with how you make your living will not compare to your wildest dreams of what your life can be like.

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WR March 24, 2010 at 5:57 pm

Excellent article. I especially like the idea that running a business can make you inherently more valuable as an employee at any organization that values the attributes that are needed. Values such as optimism, being results oriented and providing a valuable service are core to any great organization.

I believe there are two distinct worlds in our society. These worlds are not divided across racial or gender lines. They are the world of the Business Owner and the Employee. The American dream is predicated on opportunity and nothing embodies this ideal better than the adventure of the entrepreneur. These two worlds have their own tax systems as well. Employees are taxed on their income, Businesses are taxed on their profits. Can you guess which one is better?

Operating a business is a risky endeavor and is not for everyone. You need to be able to adeptly switch hats. To be successful you may need to be 50% salesman, 50% Accountant and 50% Lawyer in addition to attention to the “Core Business” (yes, I realize am am way over 100%, kind of the point :) ). There are so many things to keep track of and so many legal gotchas to consider. Consider that Savvy Entrepreneurs don’t form Nevada Corporations for the tax breaks (there really are none), they do it for the legal protection. It is simply harder to pierce the corporate veil in Nevada.

That said, having both a day job and a side, home based business based on your passion is the best of both worlds. Think of it as a hobby that pays dividends. A business based on a passion can pull you through many of the aforementioned hardships.

I am a firm believer that many people should consider entrepreneurship.

-WR

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Ben September 16, 2010 at 8:13 am

I own several businesses within two corporations.

I was so stunned by the difference between the mentality of a business owner versus an employee over the past few years.

I cannot even comprehend the life of a person who clocks out at five and doesn’t think about things until they clock back in. STUNNING.

Completely, and utterly stunning to me.

Well, as I began my business I earned enough money in about 4-6 days of work per month to pay all my expenses. So I woke up at age 24 after college, with the question… What would I like to do today?

After almost six days off each week, of doing whatever I truly wanted, and learning what I wanted, and eating out all I wanted… Going hiking. I realized I wanted to occupy my life with my occupation. So I expanded dramatically and opened other businesses I found interesting. Summer camps, a retail shop, a restaurant, soon a martial arts school, an events space business.

I didn’t even mention here my core profession.

Reality, employers pay you what they have to, to keep you there. Businesses generate as much revenue as you want. That is what they are for. And if you generate 1 million dollars at a job, it is guaranteed most of that goes to someone else.

Running my own business, $40,000 felt like about $70,000 that my friends were earning. Now given time building my $75,000 feels like about $125,000 due to tax incentives of owning a business. And. The friends still make around $75,000 or lost their jobs.

Hmmm… What will happen as the economy recovers to all eight businesses I opened, setup, and staffed this year?

Let you know in a couple years when I retire at 35 and bounce to Tahiti, Italy, and New Zealand.

(In summary: I rented a single bedroom after college and paid next to nothing to live. Then, I basically had more time off in my first year after college than most people have in their entire careers. Being in charge and an entrepreneurial expert awakens the best qualities in me. I get to think, be brave, form relationships with amazing business people way smarter than me… And I find that while business makes money, I am a better and smarter person every day because of how it challenges me. Leave your friends in the dust. Make new friends who are starting businesses by going to networking groups you can find on the web. You will be on the ride of your life.)
Ps. We raised over $600,000 this year to open these. Older people, close friends, family has all that equity in their houses. Some will only live a few years longer and have massive amounts of equity. The right person would find great excitement in having one last hurrah with you.

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Ben September 16, 2010 at 8:25 am

Pps. My core business, not mentioned here, doubled during the “great recession.”. Small businesses are flexible and can rapidly adapt. I went from one part time person to five different part time people and project teams. And I added about 23 other people at my other projects.

One business is doing okay, but I don’t enjoy operating it. So, I am closing it to focus on the ones I have a lot of fun with.

Once you know what you are doing, you can just do that.

Here’s a secret… Right now, your closest friends are your confidants and mentors. If try are not entrepreneurs, they will all have a mindset that will prevent you from being entrepreneurs.

Find the smartest people you know, successful in your field where you want to open a business. Find mentors in every avenue of what you want to do.
Some are tax wizards. Some really know how to market. Make new, truly brilliant friends… By… Well… ASKING.

Hey… I want to learn a little bit about running a business and you seem to know what you are saying… Can I treat you to lunch some time and ask some questions?

It is truly fun when someone doesn’t tell me to shut up and stop telling them how to do things. (ps… My employees learn how valuable all our brains are together in concert.) I get to watch someone’s entire success explode.

Wrong friends? They will talk you out of starting a business and not help your success. Right friends? They are already successful in business to any degree and you will figure it out together.
(I developed about 11 mentors over my time in business. Three know the entire works. It takes time to find those three. The other mentors make it so you have something you can teach those three.)

Ppps. Learning and intellectual challenge is actually one of the few forms of happiness. When challenged, you will find yourself oddly happy. More happy than even when you succeed. It is like grilling on a barbecue… You can’t know the pleasure of it until you have your own fire with flaming meat on it.
Ah…. It is Thursday at noon. I’m going to go BBq and then play frisbee golf until about 7. Then I have a few things I will want to finish later tonight.

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Lexi November 1, 2010 at 9:38 pm

Hi Ben, after reading all of your replies to people on this site, I noticed and realized that you must be super versed in the ways of business. I’m a teenager (16) and looking to start my first business soon (a pet sitting business) and I’ve got many plans for other businesses, but right now I’m really focusing on the pet sitting. It’s insanely hard to find a mentor, especially one who would take on the task of helping a teen with a pet sitting business, but I’d be more than ecstatic if you’d shoot me a message and we can talk. I’d really love if you can mentor me in any way about business, teach me what you know. I hope you get this—thank you.

heytherebrah@aol.com

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Ben November 1, 2010 at 10:02 pm

Messaged you via email. Hope I can help.
Then you can pass info on too.

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Jonny | thelifething.com March 25, 2010 at 4:50 am

Lol, It can also cause you to lose hair, but I highly recommend it to everyone.

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Regus March 25, 2010 at 8:10 am

I second the comments above. Starting a business can become a full time, 24/7 gig. But, this is the time to make our own way. Everything is changing so quickly — might as well stake a claim in something you believe in.

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Betty March 25, 2010 at 7:05 pm

Nice article. I’ve started the process of planning for my retirement and it looks like I will need to start some type of business to generate supplemental income.

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Ben September 16, 2010 at 8:35 am

Betty. That is employee think.
Start a business in something you are passionate about, make careful directional choices to where the money is along the way, and you will find your time occupied and you will be happier, healthier, smarter, and live longer because you won’t just be watching TV in your retirement.

Oh.. I forgot to say, you will make a little money along the way. Right.. There is that.

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Kasia August 13, 2012 at 5:26 pm

Hi Ben,
I have been an employee for about 5years now (I’m 24), but for the last year all these ideas started to come to me about starting up my own businesses. I know I have it in me to be my own boss. It feels great to have all these ideas as they involve doing what I love and what my passions in life are, however when I looked for someone to guide me and be my mentor, I did not have much luck. It must be fate for me to read this article and read what you had to say, because I have been thinking about doing it more and more for the past couple of days… So I wondered, if you would be interested in sharing your experiences and knowledge with me at all? I would love to learn to how to be a successful business owner and I would appreciate if you would be willing to help. Thanks, Kasia (kate_lbn@hotmail.com)

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FX March 25, 2010 at 7:36 pm

For me, it’s the opportunity for growth which makes owning a small business really appealing. More opportunities can open up when you have a small business. And that small business may eventually grow into bigger and more diverse enterprises for you.

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Ben September 16, 2010 at 8:37 am

Exciting as hell. Sure beats doing the same mechanical tasks every day for one’s entire existence.

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Smarter Spend March 26, 2010 at 9:26 pm

I find that the biggest benefit of owning a small business is that your growth is limited to your effort and planning. If something goes wrong, you don’t have a boss or manager to blame, its all on your shoulders to deliver. Of course, this comes with some stress and responsibility, but if things go well, you’re the one that benefits.

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Ben September 16, 2010 at 8:38 am

You benefit yes, but all the sudden the challenges have helped you iron out your weaknesses. So you are smarter, stronger, more agile… And you end up finding friends that way too. It helps make you into a person of stronger character and ability. It is amazing how much you will grow along with your business.

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HTB April 12, 2010 at 4:09 pm

wow, I sense a great deal of caution amongst you people. I’m just coming out of college and have decided to swipe the whole Job idea and risk it all in business… hmm I’m getting the creeps now…brrr

Anyway I havent gone anywhere in life so nothing to loose and all to gain.

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Ben September 16, 2010 at 8:47 am

Do it. I’ll admit I had work experience from a young age, but do it.
Tip #1: if you rent a room that is about $500 per month in a wealthy region of the country it is very hard to go out of business.
Tip #2: take on more expenses when they are a piece of cake.
I started in a tiny room with two $25 dressers from value city and a mattress on the floor. It was an aerobed at first.
Tip #3: when you begin doing something worthy, help arrises from all around. Your parents may chip in on a few things you cut spending on. The right talent to build what you want will emerge in your life.
Tip# 4: Just do it. I look for intrapreneurs when I hire. People who know how to build business like an entrepreneur from within my businesses. Every way you challenge yourself to grow and learn in your own business will be an asset even if you don’t work for yourself all the time.
Tip #5: Once you own a business and are a success, you can negotiate for ownership when you get involved in other new ventures. (While Other people negotiate for pay.). You have to learn how to be worth it though. And you will.

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Henry June 11, 2010 at 10:10 am

I registered my music label a few months back I have been working full time and making some good extra money on the side i offer leases online and some exclusives for I have been bringing in about an extra $600.00 a month on top of my regular income of about $1,900. I got my tax id number, business account and paypal set it truly is stressful building from scratch and you should definitely start with a few hundred dollars for things like Quickbooks. I have spent several of the business funds on advertisement.

My only question is if you sell an item for a certain amount and for example paypal charges me to receive those funds, do I claim taxes on what I sold the item for or what I actually received.

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MoneyNing June 11, 2010 at 10:48 am

I’m not a tax professional so it’s best to check with one. However, the paypal fees are legitimate business expenses, so you should be able to deduct it from your business income.

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Ben September 16, 2010 at 9:15 am

Henry, great question. Begin to learn these terms. Gross income, deductible expenses, and profit. You will report your gross income to the IRS. You will include an expense report they just call a schedule C. I use paypal and all fees associated are a tax deduction. People will pay more when they can use a credit card. About 25% studies have shown. So, your revenue increases by accepting credit cards and all associated expenses are deductible.

For all readers: getting your financials in order by my definition means using Mint.com.
For learning, do your accounting at H and R block and they give you checklists and do your taxes with you. Learn in advance what is deductible and build around those items.
Also, consider your marketing expenses based on lowest cost for biggest bang. Aka. Marketing shouldn’t in the end be a cost. You should spend $2 to make $10. Sort out what you believe will help make your business snowball.

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Steve Miner August 3, 2010 at 10:28 am

I think this article and all comments encompass most of what to expect. I come from the other side of the fence, where I started working my new business every hour it was open. It is a small sandwich shop in Portland, ME. I lived off of modest savings for a few months and now I just had to get a 40 hr / week temp job to supplement, surivive, and grow the business. Profit takes time. I can afford to pay someone to man the shop while I go to the office. 7 day weeks are a reality. I was prepared for it, so it is all going well.
You also have to be willing to dump some core areas of your business if they are not working out and add things that you may have not originally intended.
Don’t give up when things look bleak. I think it was Winston Churchill who said “When you are going through hell, KEEP GOING….”

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Ben September 16, 2010 at 9:18 am

Steve, you opened a sandwich shop. Talk to any sandwich shop owner and biz is like that.

Look at the photographer story above. He works 10 hours some weeks.

Choose based on how you want it to be.

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DENVERFHAMORTGAGE August 21, 2010 at 9:58 pm

Owning a business can be a great, life enhancing move. Make sure you don’t go into too much debt to do it though because that’s when the trouble starts.

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SRD September 13, 2010 at 2:41 pm

I currently own and operate 2 small business in Texas. I have owned and started others. My advice, find a good union job and sock away the money. Small business has its benefits, but with the current political climate, entrepreneurship is just too costly.

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Ben September 16, 2010 at 10:15 am

Bs. I’ve heard that constantly. I live in DC where the political climate is present constantly.

Try opening a business for this new era, on the web… With a talent.

Yeah it was costly and hard to open my new restaurant, but who needs another one? They are regulated heavily to keep people safe and yes many businesses… We don’t really need another one of.

I opened a Medieval Dinner Theater… Now that we needed.

The biggest trouble I found was finding a full compliment of people for it.
But, they are all there now.

Start a business where you need to worry about political climate as your third business.

Start a business now where overhead is low and regulation isn’t heavy.
Search engine optimization businesses are not heavily regulated, you make great money, work from home.

Political climate… Jeeze.. What was it like during Vietnam, World War 2, good lord my friend, we have faced far tougher times.

Start a business in a newly emerging field and you will find government incentives as your tailwind. Start a business in a long established field where plenty of people have screwed up and you will find regulations.

Aka. The sandwich shop has all sorts of health code because people get sick otherwise. Building code prevents the US from looking like Haiti after an Earthquake.

Just pick a business you can handle.
My businesses are all exploding right now.
Massive growth,
Yes, there was a cost to enter… There were some people I ran into… And rules of the road… And politics…
But, seriously man… There are 300 million people bumping into each other in our country now. More needs to be regulated so we don’t kill each other. Sorry, we aren’t that well behaved to do it on our own.

That’s a downside. A benefit is, there are now 300 million customers to bump into.
My Grandfather used to say ” the good old days weren’t always the good old days.” Sure, times were simpler, but his best friend died of a simple illness he contracted a week after he got home from his honeymoon. No antibiotics.

Start virtual, not bricks and mortar. When you’ve got something going, build structures to support your momentum.

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Randy September 16, 2010 at 5:11 am

I work full time and have a small business and do subcontracting for the company I work full time for. I really enjoy it. I have a co-worker who helps me. There are a few weekends that all I do is work and sometimes getting paid takes awhile in this economic climate. Its just in me to have something on the side to make xtra money. If your spouse hates your business, that is a huge downside. Fortunately mine is my best friend and bookkeeper. She even helps at the workshop when it is busy. Renting a workshop is like making a car payment when side business is slow, but all that rent is a tax deduction as well as a lot of the expenses associated with your home/office.

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Dee Murphy March 24, 2011 at 8:27 am

“If you own the business, you can continue to increase your own income by increasing that of the business.”

So true.

If you’re working for an employer, you’re usally getting the same hourly wage or the same salary no matter how much work you do in a day, or how much thought you put into a decision.

With your own business…those extra hours and creative thoughts will create more business, and in turn more income.

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Michelle @MinrvaGroup September 3, 2011 at 8:30 am

Starting your own business is very exciting. It’s a way for a lot of people to do what they love. I work with many business owners on the financial planning side of their business. I’ve learned so much from them.

One very important observation is many people love what they do and think they can do more of it and better if they go into business for themselves. What they don’t realize is there is so much to owning your own business, and you end up wearing many hats. For example, I have a few photographer clients. They love the art of taking pictures. They don’t love marketing, administrative work, business planning, bookkeeping, accounting, time management, budgeting, etc. In any business if you don’t market yourself you won’t make it. The built-it-and-they-will-come model doesn’t work. Many are surprised at how much time is spent marketing.

Another example, I have a friend who is a phenomenal artist. She often talks about opening a gallery to showcase her work. Then she says she wants to spend her time painting not running a gallery. If she runs a gallery she won’t have time to paint.

I’m not trying to discourage anyone from starting their own business. Quite the opposite in fact. I believe your chances of being more successful are greater when you plan and consider all the necessities. Be prepared to spend half of your time marketing. Also realize you will likely have to try several marketing initiatives before finding one that works.

One last tip, the fastest easiest way to have more money is to pay less taxes. Proper tax planning with a great accountant and financial advisor is key. People who do their own accounting and financial planning risk improper planning which can come at a significant cost. You wouldn’t do your own dental work. Leave the tax planning to the professionals so you can focus on doing more of what you love.

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